China must address African rail project risk

No country in the world has ever built so many high-speed railways in such a short period of time and pushed for high-speed rail diplomacy as China, which has attracted worldwide attention. China’s high-speed rail brands have also gained popularity.

The question is whether the country’s high-speed railway projects can be launched in Africa. Undoubtedly, high-speed railways can speed up connectivity and promote economic integration in Africa. The projects would also align with the African Union’s Agenda 2063 action plan. However, the threshold for building high-speed rails is high. It requires massive investment and a high occupancy rate. Given that high-speed trains are driven by electrical power and power consumption shows stepped increases as speed picks up, there must be a sufficient power supply. Additionally, the economy of the host countries must be relatively developed. So far, no African country can meet these conditions. Chinese investors may face risks in launching high-speed rail projects.

Chinese firms may be unable to recoup their investment. Large wild animals in Africa may disturb rail construction. If the track is lifted above the ground, the construction cost will be pushed up as the supply of cement in Africa could not meet the demand and high quality cement would be required. For infrastructure projects, African countries usually require companies to acquire land at their own cost, hire local workers and use raw materials purchased locally, which raises construction costs and economic risks.

China’s overseas high-speed railway projects are mostly financially backed by Chinese policy banks, with the bid usually too low. Loans are offered with low interest rates and a long grace period and host countries are granted more flexible shares of ownership without having to provide a lot of supporting capital. This may result in prolonged delays in repayment and negotiation for debt restructuring and drag Chinese policy banks into bad loan traps.

Additionally, host countries may struggle in making these projects self-sustaining. Although the rail projects are largely financed by Chinese investors, host countries need to manage the operations and maintenance of the rails after the project is delivered. Given that most African countries lack expertise in rail maintenance and operation, there is a risk that the railways may incur losses. Besides, since construction is backed by Chinese banks, this may increase countries’ reliance on China and cause the debt ratio of these countries to rise beyond the warning line.

Given the risks, the launch of high-speed rail projects in Africa is currently unfeasible. But transport infrastructure projects are still a priority in Sino-African cooperation. At the same time, some African countries have begun worrying if US aid might shrink under President Donald Trump. This will make financial support from China to Africa even more important. Therefore, China could help Africa build more railways such as the Addis Ababa-Djibouti Railway, which links the capital cities of Ethiopia and Djibouti and was launched last year, and promotes regional integration.

To minimize risks, Chinese firms should focus on risk assessment. They should not only make assessments based on concrete conditions such as land, environment, geology, resources and technical specifications but also on factors such as geopolitics, religious beliefs, customs, pubic opinion and cultural conflicts. Based on these assessments, firms could work out the technical proposal for railway planning, prospecting, construction, equipment, operation, maintenance and financing. Meanwhile, Chinese partners need to provide detailed data on investment, cost, operation and passenger capacity to host countries to facilitate their decision-making.

Furthermore, diversified ways of financing need to be developed to offset risk and avoid passing debt risks onto Chinese policy banks. Public-private partnerships can be adopted to allow Chinese firms, Chinese commercial banks and the private sector from host countries to work together to develop a feasible operation model for project cooperation to spread the risks and to clarify responsibility for financing, project supervision and assessment. For host countries that have a solid source of revenue, such as Nigeria, we should encourage them to co-finance the projects. For resource-rich countries, commodity-backed loan agreements, known as the Angola model, can be adopted to allow them to convert their resource exports into stockholdings. We can also encourage countries to issue international bonds to attract the World Bank and regional development banks to co-finance their projects.

Lessons should be learned from the China-constructed Tanzania-Zambia Railway which has suffered losses due to insufficient maintenance, operational problems and frequent occurrence of accidents. The model which ensures seamless connection between construction and operation currently adopted for the Addis Ababa-Djibouti Railway may provide guidance for future projects in order to avoid operational risks and maintenance problems. After the rails are put into operation, there should be a transitional period when the Chinese firms continue to take charge of the operation and management of the project and help train local operational and managerial personnel. This model not only ensures operational safety and will bring more economic benefits, but will also promote technical transfer and allow the projects to be self-sustainable.